Registered Plans Directorate Newsletter, no. 89-1
December 13, 1989

Transitional Registration Rules for Pension Plans

TABLE OF CONTENTS

PART A - INTRODUCTION

PART B - TRANSITIONAL REGISTRATION RULES FOR PENSION PLANS

1. New Plans
2. Existing Plans
3. Retroactive Registration
4. Bridging Benefits
5. Significant Shareholders/ Persons Connected
6. Inter-plan Transfers
7. Transfer of Payments out of Pension Surpluses

PART C - DEFERRED PROFIT SHARING PLANS

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PART A - INTRODUCTION

This is the first of a series of newsletters to be issued from time to time by Revenue Canada's Registered Pension and Deferred Income Plans Division. The purpose of this series is to outline administrative policies and procedures which are developed as a result of the proposed pension reform legislation tabled by the Minister of Finance on December 11, 1989. It is anticipated that this information will eventually be incorporated into new Interpretation Bulletins and Information Circulars.

The administrative rules in effect for all pension plans submitted to the Department for registration prior to March 28, l988 are published in Information Circular 72-13R8 issued December 16, l988. This newsletter outlines transitional rules for pension plans which are in effect until the proposed legislation receives royal assent. It replaces previous transitional rules released in our letter dated February 2, 1989. It also outlines the forthcoming changes concerning deferred profit sharing plans.

The newsletter has been divided into various parts. The numbering of these parts will remain constant from one newsletter to another. For example, information on registered pension plans will always be found in Part B and deferred profit sharing plans in Part C. Parts will be added when new subjects are introduced.

The information contained in this newsletter is based on the assumption that the draft pension reform legislation tabled in Parliament by the Minister of Finance on December 11, 1989 will receive the approval of Parliament. If there are any changes to the proposed legislation these will be covered in a future newsletter.

PART B - TRANSITIONAL REGISTRATION RULES FOR PENSION PLANS

The proposed tax legislation defines an "existing plan" as a pension plan for which an application for registration was made to the Minister before March 28, l988. All plans that do not meet this definition are considered to be new plans.

1. New Plans (Money Purchase and Defined Benefits)

New plans submitted for registration after March 27, l988 and before the proposed legislation receives royal assent will be reviewed according to Information Circular 72-13R8 and items 4, 5, 6 and 7 below. If a new plan does not meet the conditions of the circular and the additional items mentioned above, the appropriate amendments will be requested. Registration, once granted, will be conditional upon receipt of approval under the Pension Benefits Standards Act, 1985 or a similar law of a province (if applicable).

On December 11, 1989 the Minister of Finance announced that for new plans the new registration rules take effect January 1, 1989. Nevertheless, until the proposed legislation has been enacted these plans may be administered in accordance with the plan as registered. Following royal assent, a new plan will need to be administered in compliance with the new law. All plans must be revised to reflect the new legislation and will need to be submitted to the Department for approval as soon as possible, however, no later than one year from the date the proposed legislation receives royal assent. Amendments required by January 1, l991 to incorporate the pension adjustment limitations may be submitted simultaneously.

The requirement to revise a new plan in accordance with the new legislation does not preclude the requirement to submit any amendments previously requested on the basis of the circular.

Any new plan submitted for registration after the adoption of the new legislation must comply in all respects with the new requirements.

2. Existing Plans

(a) Money purchase

Existing plans that provide benefits solely on a money purchase basis may be administered in compliance with the plan as registered until the proposed legislation has received royal assent.

Following royal assent, these plans will have to be administered in accordance with the new legislation. Revisions to existing money purchase plans must be submitted to Revenue Canada as soon as possible, however, no later than one year from the date the proposed legislation receives royal assent. Amendments required by January 1, l991 to incorporate the pension adjustment limitations may be submitted simultaneously.

(b) Defined Benefit

The proposed legislation introduces the term "grandfathered plan." In general, a grandfathered plan is an existing plan that contains a defined benefit provision or a plan established to replace benefits under another grandfathered plan.

Grandfathered plans may be administered as registered until the proposed legislation receives royal assent. After royal assent has been received the plan must comply with those registration requirements that take effect on January 1, 1989. Those requirements include, for example, restrictions on investments and borrowing as well as limits on money purchase benefits.

It is expected that most grandfathered plans will be able to comply with those registration requirements that are effective January 1, 1989 without having to be amended. However, to the extent that amendments are required, they must be submitted to Revenue Canada no later than one year from the date the proposed legislation receives royal assent.

Those registration requirements that relate to defined benefits (such as eligible service, the maximum pension limit and limits on ancillary benefits) take effect on January 1, 1992 and apply only with respect to service after 1991.

Therefore, beginning in 1992, the defined benefit provisions of all existing plans will be subject to the new registration rules. Plans must be revised to reflect the legislation after royal assent has been received and amendments must be submitted prior to the 1992 coming into force date.

Amendments to existing defined benefit plans that are submitted before 1992 will be dealt with on a case-by-case basis. Generally, amendments to existing plans that bring the plan in closer conformity with the new registration rules will be accepted while those amendments that move the plan away from the proposed new rules will not be accepted.

3. Retroactive Registration

The proposed legislation specifies that when a plan is submitted for registration after 1990, the effective date of registration of the plan cannot be before January 1 of the calendar year in which the application is made.

For plans submitted for registration before 1991, the effective date of registration may be prior to the year of application and will be as specified in writing by the Minister.

4. Bridging Benefits

Paragraph 9(b)(vi) of the Information Circular 72-13R8 indicates that "reasonable" bridging benefits may be payable from a registered pension plan.

Although the term "reasonable" for this purpose had not been defined in the past, effective March 28, 1988 a bridging benefit will be considered "reasonable" if it is equal to or less than the benefit which would be permitted under the proposed legislation.

Plans submitted for registration after March 27, 1988 which provide bridging benefits, will be reviewed according to the rules set out in the proposed legislation as will all amendments submitted after March 27, 1988 which add or enhance bridging benefits provided under existing plans.

5. Significant Shareholders/Persons Connected

Paragraphs 8(b)(ii) and 8(d) of the circular, which deal with partners, proprietors, significant shareholders and related persons, will continue to be in effect until January 1, 1991 when the proposed regulations for "persons connected with an employer" become effective.

The next newsletter will address the requirements for significant shareholders and related persons. It will cover the rules in effect before and after the effective date of the proposed legislation.

6. Inter-plan Transfers (Lump Sum and Periodic Amounts)

(a) Lump Sum

As of January 1, 1989, the transfer of lump sum amounts between registered plans is governed by the direct transfer rules.

Revenue Canada is developing a direct transfer form which will be available at our district taxation offices. We will advise you in a subsequent newsletter when this form will be available.

For the 1989 taxation year, carriers should treat qualified inter- plan transfers as outlined in the proposed legislation and should stop issuing T4A slips and receipts. Documentation to support such transfers (covering letters, internal company forms etc.) should be prepared until the authorized form for this purpose is available. It will not be necessary to continue completing Form TD2 - "Tax deduction waiver in respect of funds to be transferred."

You may obtain additional information concerning inter-plan transfers from the Source Deductions section of your local Revenue Canada district taxation office.

(b) Periodic Amounts

Indirect transfers of periodic retirement income are still accommodated in 1989 under paragraphs 60(j) and (k) of the Act. In addition, the transfer of up to $6,000 of periodic income from a registered pension plan or deferred profit sharing plan to a spouse's registered retirement savings plan will be possible until the end of 1994.

7. Transfer of Payments out of Pension Surpluses

Payments made out of an actuarial surplus of a registered pension plan after March 27, 1988 may be transferred tax-free to another registered pension plan if this surplus is transferred on an unallocated basis.

An actuarial surplus may be transferred from one defined benefit plan to another, if the amount is transferred as a consequence of benefits becoming provided under the receiving plan to individuals who were members of the transferring plan.

Surplus amounts may also be transferred, subject to the approval of the Minister of National Revenue, when benefits under a defined benefit plan are replaced by benefits under a money purchase plan. The surplus amounts in the money purchase plan must be used to satisfy employer contributions. In addition, no employer contributions may be made to the plan until there is no surplus remaining.

PART C - DEFERRED PROFIT SHARING PLANS

The major changes to the Deferred Profit Sharing Plan (DPSP) registration rules are effective January 1, 1991 and affect contributions, vesting and forfeitures.

Under the proposed amendments to the DPSP registration rules, contributions by an employer will be restricted to those contributions permitted under the terms of the plan. The plan terms will have to comply with the registration rules set out in the Income Tax Act as amended by the proposed legislation.

Contributions by employees will be prohibited under the proposed amendments to the DPSP rules. Under the existing rules, employee contributions are allowed, but they are not deductible.

Vesting requirements will be reduced from the existing maximum of five years to a period of twenty-four consecutive months of participation in the DPSP.

Plans will be required to include specific terms restricting the reallocation of forfeited amounts. The period of reallocation of such forfeitures has been extended to the end of the calendar year following the calendar year of the forfeiture.

The above-noted rules are generally effective for 1991. All DPSP's must be revised to reflect the new legislation as soon as possible, and amendments must be submitted no later than one year from the date the proposed legislation receives royal assent.

The transfer of lump sum amounts from a DPSP to another registered plan will be regulated by new rules similar to those affecting registered pension plans. The proposed rules permit the transfer of lump sum amounts between plans on a tax-free basis if the transfer is made directly. The transfer rules are effective commencing January 1, 1989. Please refer to item 6 above, with respect to reporting requirements.

PENSION REFORM INFORMATION

Additional information is available from the following sources.

1. For determination of pension adjustments by plan administrators:

Revenue Canada
Registered Pension and Deferred Income Plans Division
(613) 954-0419 (English)
(613) 954-0930 (French)

2. For pension adjustment reporting requirements:

Revenue Canada Source Deduction officials in the district taxation offices

3. For information on legislative provisions:

Department of Finance
(613) 995-1175
(613) 996-0598
(613) 992-3114

Revised December 11, 1989